Annual Report 2017

CORPORATE GOVERNANCE STATEMENT

The Company hosts briefing sessions for investors and analysts PRINCIPLE 8—REMUNERATE FAIRLY AND
on its half and full year results and other times, as deemed RESPONSIBLY
necessary. All material information and presentations are
lodged with the ASX and are made available on the Company’s The Company has a Nomination and Remuneration Committee,
website, where there is sound commercial reasons for doing so. as disclosed earlier in “Principle 2—Structure the Board to add
value”.
The scheduling of the Annual General Meeting is considered to
be convenient to the greatest number of its shareholders. The The Committee considers remuneration policies and practices
notice of meeting will be accompanied by explanatory notes generally, and makes specific recommendations on remuneration
on the items of business to accurately explain the nature of the packages and other terms of employment for executive directors
business of the meeting. Shareholders are encouraged to attend and other senior executives. The Committee, having regard to
the meeting, or if unable to attend, to vote on the moments performance, relevant comparative information and independent
proposed by appointing a proxy. expert advice, reviews executive remuneration and other terms
of employment annually. As well as a base salary, remuneration
The share registry offers shareholders the option to receive packages include superannuation and performance related
communications electronically. bonuses. Remuneration packages are set at levels that are
intended to attract and retain executives capable of managing
PRINCIPLE 7—RECOGNISE AND MANAGE RISK the consolidated entity's operations.

The Board, through the Audit and Risk Committee, is responsible Remuneration of non-executive directors is determined by
for ensuring there are adequate policies in relation to risk the Committee within the maximum amount approved by the
management, compliance and internal control systems. The shareholders from time to time.
Group's policies are designed to ensure strategic, operational,
legal, reputational and financial risks are identified, assessed, Further information on directors’ and executives’ remuneration is
effectively and efficiently managed and monitored to enable set out in the directors’ report under the heading "Remuneration
achievement of the Group's business objectives. The Company’s report."
exposure to economic, environmental and social sustainability
risks are set out in the directors’ report.

Considerable importance is placed on maintaining a strong
control environment. There is an organisation structure with
clearly drawn lines of accountability and delegation of authority.
Adherence to the Code of Conduct is required at all times and
the Board proactively promotes a culture of quality and integrity.

The Company’s risk management policy and the operation of
the risk management and compliance system is managed by
the Company Risk Management Committee which consists of
senior executives. The Board receives regular reports from this
group as to the effectiveness of the Company's management
of material risks that may impede meeting business objectives.
A review of the Company’s risk management framework was
completed during the reporting period.

Risk Management Accountability

As part of the process of approving the financial statements,
at each reporting date the Chief Executive Officer and Chief
Financial Officer provide statements in writing to the Board on
the quality and effectiveness of the Company’s risk management
and internal compliance and control systems.

In the absence of a dedicated internal audit team, the Company
employs the services of professional third parties from time to
time to review and make recommendations on the Company’s
internal control processes. The Audit and Risk Committee is
satisfied that the activities undertaken by management and the
internal loss prevention teams are sufficient in assessing and
monitoring the Company’s risk profile and internal control
processes.

SPECIALTY FASHION GROUP | 50

ANNUAL FINANCIAL
STATEMENTS

TABLE OF CONTENTS GENERAL INFORMATION

Consolidated statement of profit or loss The financial statements cover Specialty Fashion Group Limited
and other comprehensive income 52 as a consolidated entity consisting of Specialty Fashion Group
Consolidated statement of financial position
Consolidated statement of changes in equity Limited and the entities it controlled at the end of, or during,
Consolidated statement of cash flows 53 the year. The financial statements are presented in Australian
Notes to the financial statements 55 dollars, which is Specialty Fashion Group Limited's functional
Directors' declaration
Shareholder information and presentation currency.
56

Specialty Fashion Group Limited is a listed public company
57 limited by shares, incorporated and domiciled in Australia. Its

registered office and principal place of business is:
101

151–163 Wyndham Street, Alexandria, NSW 2015
102

T: (02) 8303 9800
F: (02) 8306 3596

A description of the nature of the consolidated entity's
operations and its principal activities are included in the
directors' report, which is not part of the financial statements.

The financial statements were authorised for issue, in
accordance with a resolution of directors, on 29 August
2017. The directors have the power to amend and reissue the
financial statements.

51 | SPECIALTY FASHION GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2017

Consolidated

Notes 2017 2016
$'000 $'000

Revenue 4 808,914 826,240

Expenses 2,106 (322)
Changes in inventories of finished goods and consumables
Finished goods and consumables used (358,182) (366,867)
Employee benefits expense
Depreciation, amortisation and impairment expense (216,976) (215,242)
Rental expense
Other expenses 5 (24,621) (21,485)
Finance costs
5 (135,854) (133,416)

5 (79,654) (87,200)

5 (2,207) (3,248)

Loss Before Income Tax Expense (6,474) (1,540)
Income tax expense
6 (1,915) (650)

Loss After Income Tax Expense for the Year Attributable to the Owners of 25 (8,389) (2,190)
Specialty Fashion Group Limited

Other Comprehensive Income/(Loss) 24 (608) (11,777)
Items that may be reclassified subsequently to profit or loss
24 (178) 586
Change in the fair value of cash flow hedges taken to equity
24 182 3,533
Exchange differences on translation of foreign operations

Income tax expense relating to the components of other comprehensive income

Other comprehensive income for the year, net of tax (604) (7,658)

Total Comprehensive Income for the Year Attributable to the Owners of (8,993) (9,848)
Specialty Fashion Group Limited

Cents Cents

Basic Loss Per Share 37 (4.4) (1.1)
Diluted Loss Per Share
37 (4.4) (1.1)

The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.
SPECIALTY FASHION GROUP | 52

CONSOLIDATED STATEMENT OF FINANCIAL POSITION Consolidated

CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes 2017 2016
AS AT 30 JUNE 2017 $'000 $'000

Assets 7 17,431 18,945

Current Assets 8 9,054 9,469
Cash and cash equivalents
Trade and other receivables 9 90,839 88,733
Inventories
Derivative financial instruments 10 3 8
Income tax receivable
Total current assets 11 35 758

Non-Current Assets 117,362 117,913
Property, plant and equipment
Intangibles 12 57,299 73,633
Deferred tax asset
Total non-current assets 13 22,983 21,133

Total Assets 14 4,901 5,764

85,183 100,530

202,545 218,443

The above consolidated statement of financial position should be read in conjunction with the accompanying notes.
53 | SPECIALTY FASHION GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Consolidated

Notes 2017 2016
$'000 $'000

Liabilities 15 84,067 83,495

Current Liabilities 16 4,325 4,458
Trade and other payables
Derivative financial instruments 17 33 217
Income tax provision
Provisions 18 21,029 21,059
Other
Total current liabilities 19 5,340 6,076

Non-current Liabilities 114,794 115,305
Trade and other payables
Borrowings – 1,192
Derivative financial instruments
Provisions 20 25,714 32,248
Other
Total non-current liabilities 16 742 –

Total Liabilities 21 10,607 8,158
Net Assets
22 6,613 8,472
Equity
Issued capital 43,676 50,070
Reserves
Accumulated losses 158,470 165,375
44,075 53,068
Total Equity
23 134,497 134,497
24 (3,379) (2,775)
25 (87,043) (78,654)

44,075 53,068

The above consolidated statement of financial position should be read in conjunction with the accompanying notes.
SPECIALTY FASHION GROUP | 54

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2017

Consolidated

Issued Reserves* Accumulated Total
Capital $'000 Losses Equity
$'000 $'000 $'000

Balance at 1 July 2015 134,497 4,883 (76,464) 62,916
Loss after income tax expense for the year – – (2,190) (2,190)
Other comprehensive income for the year, net of tax – – (7,658)
(7,658)
Total comprehensive income for the year (9,848)
– (7,658) (2,190)
Balance at 30 June 2016 53,068
134,497 (2,775) (78,654)

Consolidated

Issued Reserves* Accumulated Total
Capital $'000 Losses Equity
$'000 $'000 $'000

Balance at 1 July 2016 134,497 (2,775) (78,654) 53,068
Loss after income tax expense for the year – – (8,389) (8,389)
Other comprehensive income for the year, net of tax – –
(604) (604)
Total comprehensive income for the year
– (604) (8,389) (8,993)
Balance at 30 June 2017
134,497 (3,379) (87,043) 44,075

* Reserves includes foreign currency translation, hedging and share-based payments reserves. Refer to note 24 for reconciliation of reserves.

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
55 | SPECIALTY FASHION GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS

CONSOLIDATED STATEMENT OF CASH FLOWS Consolidated
FOR THE YEAR ENDED 30 JUNE 2017
Notes 2017 2016
Cash Flows from Operating Activities $'000 $'000
Receipts from customers (inclusive of GST)
Payments to suppliers (inclusive of GST) 889,059 908,715
(866,036) (875,014)
Interest received
Interest and other finance costs paid 23,023 33,701
Net income taxes (paid)/received 79 99
Net cash from operating activities
Cash Flows from Investing Activities (2,207) (3,248)
Payments for property, plant and equipment (327) 168
Payments for intangibles
Proceeds from sale of property, plant and equipment 36 20,568 30,720
Net cash used in investing activities
Cash Flows from Financing Activities (12,052) (13,487)
Repayments from borrowings
Finance lease repayments 13 (3,872) (2,895)
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents 376 335
Cash and cash equivalents at the beginning of the financial year
Cash and cash equivalents at the end of the financial year (15,548) (16,047)

(6,534) (2,688)
– (204)

(6,534) (2,872)

(1,514) 11,801
18,945 7,144

7 17,431 18,945

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
SPECIALTY FASHION GROUP | 56

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Reporting Standards as issued by the International Accounting
Standards Board ('IASB').
The principal accounting policies adopted in the preparation
of the financial statements are set out either in the respective Changes in accounting policy
notes or below. These policies have been consistently applied
to all the years presented, unless otherwise stated. As a consequence of an IFRS Interpretation Committee (IFRIC)
agenda decision issued in November 2016, management
NEW, REVISED OR AMENDING has amended its accounting policy to recognise a deferred
ACCOUNTING STANDARDS AND tax liability on indefinite life intangibles acquired as part of a
INTERPRETATIONS ADOPTED business combination. The amendment resulted in a decrease
of $2.6 million to retained earnings and increase in deferred
The consolidated entity has adopted all of the new, revised or tax liabilities as at the beginning of the earliest comparative
amending Accounting Standards and Interpretations issued period. All other accounting policies are consistent with those
by the Australian Accounting Standards Board ('AASB') that applied in the previous financial year.
are mandatory for the current reporting period.
Historical cost convention
New and revised Standards and amendments thereof and
interpretations effective for the current financial year that are The financial statements have been prepared under the
relevant to the Group include: historical cost convention, except for, where applicable, the
revaluation of available-for-sale financial assets, financial
§§ AASB 1057 Application of Australian Accounting assets and liabilities at fair value through profit or loss, and
Standards and AASB 2015-9 Amendments to Australian derivative financial instruments.
Accounting Standards—Scope and Application
Paragraphs Critical accounting estimates

The application of these amendments has had no effect on the The preparation of the financial statements requires the
Group's consolidated financial statements. use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of
§§ AASB 2014-4 Amendments to Australian Accounting applying the consolidated entity's accounting policies. The
Standards—Clarification of Acceptable Methods of areas involving a higher degree of judgement or complexity,
Depreciation and Amortisation or areas where assumptions and estimates are significant to
the financial statements, are disclosed in note 2.
As the Group already uses the straight-line method for
depreciation and amortisation for its plant and equipment, PARENT ENTITY INFORMATION
and intangible assets respectively, the application of these
amendments has had no impact on the Group's consolidated In accordance with the Corporations Act 2001, these financial
financial statements. statements present the results of the consolidated entity only.
Supplementary information about the parent entity is disclosed
§§ AASB 2015-1 Amendments to Australian Accounting in note 33. Financial information for the parent entity has been
Standards—Annual Improvements to Australian prepared on the same basis as the consolidated financial
Accounting Standards 2012–2014 Cycle statements, with the exception of investments in subsidiaries
which are measured at cost, and the current/non-current
The application of these amendments has had no effect on the classification of intercompany receivables/payables with
Group's consolidated financial statements. wholly owned subsidiaries of the parent entity.

§§ AASB 2015-2 Amendments to Australian Accounting As at 30 June 2017, the parent entity has net current
Standards—Disclosure Initiative: Amendments to AASB liabilities of $10.8 million (2016: net current liabilities
101 of $13.7 million). This has arisen due to the classification
of intercompany receivables/payables as current/non-
The application of these amendments has not had a material current with wholly-owned subsidiaries of the parent entity
presentation impact on the financial performance or financial in accordance with AASB 132 Financial Instruments:
position of the Group. Presentation. These intercompany balances eliminate on
consolidation. Notwithstanding the classification of these
BASIS OF PREPARATION balances, the parent entity is able to control the timing of
the payment of these balances by virtue of its control of the
These general purpose financial statements have been respective subsidiary entities. In addition, the directors believe
prepared in accordance with Australian Accounting that the Company can meet its debts as and when they fall
Standards and Interpretations issued by the Australian due. Refer to note 20 for further details.
Accounting Standards Board ('AASB') and the Corporations
Act 2001, as appropriate for for-profit oriented entities. These
financial statements also comply with International Financial

57 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

PRINCIPLES OF CONSOLIDATION Foreign currency transactions

The consolidated financial statements incorporate the assets Foreign currency transactions are translated into Australian
and liabilities of all subsidiaries of Specialty Fashion Group dollars using the exchange rates prevailing at the dates of the
Limited ('Company' or 'parent entity') as at 30 June 2017 transactions. Foreign exchange gains and losses resulting from
and the results of all subsidiaries for the year then ended. the settlement of such transactions and from the translation
Specialty Fashion Group Limited and its subsidiaries together at financial year-end exchange rates of monetary assets and
are referred to in these financial statements as the 'Group' or liabilities denominated in foreign currencies are recognised
'consolidated entity'. in profit or loss.

Subsidiaries are all those entities over which the consolidated Foreign operations
entity has control. The consolidated entity controls an entity
when the Group is exposed to, or has rights to, variable The assets and liabilities of foreign operations are
returns from its involvement with the entity and has the ability translated into Australian dollars using the exchange rates
to affect those returns through its power to direct the activities at the reporting date. The revenues and expenses of foreign
of the entity. Subsidiaries are fully consolidated from the date operations are translated into Australian dollars using the
on which control is transferred to the Group. They are de- average exchange rates, which approximate the rates at the
consolidated from the date that control ceases. dates of the transactions, for the period. All resulting foreign
exchange differences are recognised in other comprehensive
Intercompany transactions, balances and unrealised gains on income through the foreign currency reserve in equity.
transactions between entities in the consolidated entity are
eliminated. Unrealised losses are also eliminated unless the The foreign currency reserve is recognised in profit or loss
transaction provides evidence of the impairment of the asset when the foreign operation or net investment is disposed of.
transferred. Accounting policies of subsidiaries have been
changed where necessary to ensure consistency with the REVENUE RECOGNITION
policies adopted by the consolidated entity.
Revenue is recognised when it is probable that the economic
The acquisition of subsidiaries is accounted for using the benefit will flow to the consolidated entity and the revenue can
acquisition method of accounting. A change in ownership be reliably measured. Revenue is measured at the fair value of
interest, without the loss of control, is accounted for as the consideration received or receivable, and recognised for
an equity transaction, where the difference between the the major business activities as follows:
consideration transferred and the book value of the share of
the non-controlling interest acquired is recognised directly in Retail sales
equity attributable to the parent.
Revenue is recognised at the point of sale, which is where
Where the consolidated entity loses control over a subsidiary, the customer has taken delivery of the goods, the risks and
it derecognises the assets including goodwill, liabilities rewards are transferred to the customer and there is a valid
and non-controlling interest in the subsidiary together with sales contract. Amounts disclosed as revenue are net of sales
any cumulative translation differences recognised in equity. returns, trade discounts and commission paid.
The consolidated entity recognises the fair value of the
consideration received and the fair value of any investment Wholesale revenue
retained together with any gain or loss in profit or loss.
Revenue is recognised at time of delivery less an allowance
OPERATING SEGMENTS for estimated customer returns, rebates and other similar
allowances.
Operating segments are presented using the 'management
approach', where the information presented is on the same Lay-by sales
basis as the internal reports provided to the Chief Operating
Decision Makers ('CODM'). The CODM is responsible for the Revenue is recognised upon receiving final payment from the
allocation of resources to operating segments and assessing customer.
their performance.
Interest
FOREIGN CURRENCY TRANSLATION
Interest revenue is recognised when it is earned.
The financial statements are presented in Australian dollars,
which is Specialty Fashion Group Limited's functional and
presentation currency.

SPECIALTY FASHION GROUP | 58

NOTES TO THE FINANCIAL STATEMENTS

Other revenue Deferred tax assets and liabilities are offset only where there is
a legally enforceable right to offset current tax assets against
Other revenue is recognised when it is received or when the current tax liabilities and deferred tax assets against deferred
right to receive payment is established. tax liabilities; and they relate to the same taxable authority
on either the same taxable entity or different taxable entities
Customer loyalty program which intend to settle simultaneously.

The consolidated entity operates a loyalty program where Specialty Fashion Group Limited (the 'head entity') and its
customers accumulate points for purchases made which entitle wholly-owned Australian controlled entities formed an income
them to discounts on future purchases. The reward points are tax consolidated group under the tax consolidation regime as
recognised as a separately identifiable component of the of 1 July 2003. The head entity and the controlled entities in
initial sale transaction, by allocating the fair value of the the tax consolidated group continue to account for their own
consideration received between the reward points and the current and deferred tax amounts. The tax consolidated group
other components of the sale such that the reward points are has applied the 'separate taxpayer within group' approach
recognised at their fair value. Revenue from the reward points in determining the appropriate amount of taxes to allocate to
is recognised when the points are redeemed. The amount of members of the tax consolidated group.
revenue is based on the number of points redeemed relative
to the total number expected to be redeemed. Reward points In addition to its own current and deferred tax amounts, the
expire 24 months after the initial sale or 30 days after a head entity also recognises the current tax liabilities (or assets)
voucher has been issued. and the deferred tax assets arising from unused tax losses and
unused tax credits assumed from each subsidiary in the tax
INCOME TAX consolidated group.

The income tax expense or benefit for the period is the The entities have also entered into a tax funding agreement
tax payable on that period's taxable income based on the under which the wholly-owned entities fully compensate
applicable income tax rate for each jurisdiction, adjusted by Specialty Fashion Group Limited for any current tax payable
changes in deferred tax assets and liabilities attributable to assumed and are compensated by Specialty Fashion Group
temporary differences, unused tax losses and the adjustment Limited for any current tax receivable and deferred tax assets
recognised for prior periods, where applicable. relating to unused tax losses or unused tax credits that are
determined by reference to the amounts recognised in the
Deferred tax assets and liabilities are recognised for temporary wholly-owned entities' financial statements.
differences at the tax rates expected to be applied when the
assets are recovered or liabilities are settled, based on those The amount receivable/payable under the tax funding
tax rates that are enacted or substantively enacted, except for: agreement is due upon receipt of the funding advice from
the head entity, which is issued as soon as practicable after
§§ When the deferred income tax asset or liability arises the end of each financial year. The head entity may also
from the initial recognition of goodwill or an asset or require payment of interim funding amounts to assist with its
liability in a transaction that is not a business combination obligations to pay tax instalments.
and that, at the time of the transaction, affects neither the
accounting nor taxable profits; or Assets or liabilities arising under tax funding agreements
with the tax consolidated entities are recognised as amounts
§§ When the taxable temporary difference is associated receivable from or payable to other entities in the tax
with interests in subsidiaries, associates or joint ventures, consolidated group. The tax funding arrangement ensures
and the timing of the reversal can be controlled and it is that the intercompany charge equals the current tax liability
probable that the temporary difference will not reverse in or benefit of each tax consolidated group member, resulting
the foreseeable future. in neither a contribution by the head entity to the subsidiaries
nor a distribution by the subsidiaries to the head entity.
Deferred tax assets are recognised for deductible temporary
differences and unused tax losses only if it is probable that CURRENT AND NON-CURRENT CLASSIFICATION
future taxable amounts will be available to utilise those
temporary differences and losses. Assets and liabilities are presented in the statement of financial
position based on current and non-current classification.
The carrying amount of recognised and unrecognised deferred
tax assets are reviewed at each reporting date. Deferred tax An asset is classified as current when: it is either expected
assets recognised are reduced to the extent that it is no longer to be realised or intended to be sold or consumed in the
probable that future taxable profits will be available for the consolidated entity's normal operating cycle; it is held
carrying amount to be recovered. Previously unrecognised primarily for the purpose of trading; it is expected to be
deferred tax assets are recognised to the extent that it is realised within 12 months after the reporting period; or the
probable that there are future taxable profits available to asset is cash or cash equivalent unless restricted from being
recover the asset. exchanged or used to settle a liability for at least 12 months
after the reporting period. All other assets are classified as
59 | SPECIALTY FASHION GROUP non-current.

NOTES TO THE FINANCIAL STATEMENTS

A liability is classified as current when: it is either expected is recognised in other comprehensive income through the cash
to be settled in normal operating cycle; it is held primarily for flow hedges reserve in equity, whilst the ineffective portion
the purpose of trading; it is due to be settled within 12 months is recognised in profit or loss. Amounts taken to equity are
after the reporting period; or there is no unconditional right transferred out of equity and included in the measurement of
to defer the settlement of the liability for at least 12 months the hedged transaction when the forecast transaction occurs.
after the reporting period. All other liabilities are classified as
non-current. Cash flow hedges are tested for effectiveness on a regular
basis both retrospectively and prospectively to ensure that
Deferred tax assets and liabilities are always classified as each hedge is highly effective and continues to be designated
non-current. as a cash flow hedge. If the forecast transaction is no longer
expected to occur, the amounts recognised in equity are
CASH AND CASH EQUIVALENTS transferred to profit or loss.

Cash and cash equivalents includes cash on hand, deposits If the hedging instrument is sold, terminated, expires,
held at call with financial institutions, other short-term, highly exercised without replacement or rollover, or if the hedge
liquid investments with original maturities of three months or becomes ineffective and is no longer a designated hedge, the
less that are readily convertible to known amounts of cash amounts previously recognised in equity remain in equity until
and which are subject to an insignificant risk of changes in the forecast transaction occurs.
value.
Call options
OTHER RECEIVABLES
Call options are used to cover the consolidated entity's
Other receivables are recognised at amortised cost, less any exposure to fluctuations in cotton prices which could affect
provision for impairment. cost of goods sold. At the end of each reporting period,
the recognised asset is subsequently measured at fair value
INVENTORIES through profit or loss.

Inventories are stated at the lower of cost and net realisable PROPERTY, PLANT AND EQUIPMENT
value. Cost comprises purchase and delivery costs, net of
rebates and discounts received or receivable. Costs are Plant and equipment is stated at historical cost less accumulated
assigned to individual items of inventory on the basis of depreciation and impairment. Historical cost includes
weighted average costs. Costs also include transfer from expenditure that is directly attributable to the acquisition of
equity of any gains/losses on qualifying cashflow hedges the items.
relating to purchases of inventories.
Depreciation is calculated on a straight-line basis to write off
Net realisable value is the estimated selling price in the the net cost of each item of property, plant and equipment
ordinary course of business less the estimated costs of (excluding land) over their expected useful lives as follows:
completion and the estimated costs necessary to make the
sale. §§ Plant and equipment: 3–10 years

DERIVATIVE FINANCIAL INSTRUMENTS The residual values, useful lives and depreciation methods
are reviewed, and adjusted if appropriate, at each reporting
Derivatives are initially recognised at fair value on the date date.
a derivative contract is entered into and are subsequently
remeasured to their fair value at each reporting date. The Leasehold improvements and plant and equipment under
accounting for subsequent changes in fair value depends on lease are depreciated over the unexpired period of the lease
whether the derivative is designated as a hedging instrument, or the estimated useful life of the assets, whichever is shorter.
and if so, the nature of the item being hedged.
An item of property, plant and equipment is derecognised
Derivatives are classified as current or non-current depending upon disposal or when there is no future economic benefit to
on the expected period of realisation. the consolidated entity. Gains and losses between the carrying
amount and the disposal proceeds are taken to profit or loss.
Cash flow hedges
LEASES
Cash flow hedges are used to cover the consolidated entity's
exposure to variability in cash flows that is attributable to The determination of whether an arrangement is or contains
particular risks associated with a recognised asset or liability a lease is based on the substance of the arrangement and
or a firm commitment which could affect profit or loss. The requires an assessment of whether the fulfilment of the
effective portion of the gain or loss on the hedging instrument arrangement is dependent on the use of a specific asset or
assets and the arrangement conveys a right to use the asset.

SPECIALTY FASHION GROUP | 60

NOTES TO THE FINANCIAL STATEMENTS

A distinction is made between finance leases, which effectively Website
transfer from the lessor to the lessee substantially all the risks
and benefits incidental to ownership of leased assets, and Significant costs associated with the development of the
operating leases, under which the lessor effectively retains revenue generating aspects of the website, including the
substantially all such risks and benefits. capacity of placing orders, are deferred and amortised on
a straight-line basis over the period of their expected benefit,
Finance leases are capitalised. A lease asset and liability being their finite life of 4 years.
are established at the fair value of the leased assets, or if
lower, the present value of minimum lease payments. Lease Patents and trademarks
payments are allocated between the principal component
of the lease liability and the finance costs, so as to achieve Significant costs associated with patents and trademarks are
a constant rate of interest on the remaining balance of the deferred and amortised on a straight-line basis over the period
liability. Leased assets under a finance lease are depreciated of their expected benefit, being their finite life of 10 years.
over the asset's useful life and the lease term if there is no
reasonable certainty that the consolidated entity will obtain Software
ownership at the end of the lease term.
Significant costs associated with software are deferred and
Operating lease payments, net of any incentives received amortised on a straight-line basis over the period of their
from the lessor, are charged to profit or loss on a straight-line expected benefit, being their finite life of 4–5 years.
basis over the term of the lease.
IMPAIRMENT OF NON-FINANCIAL ASSETS
INTANGIBLE ASSETS
Other non-financial assets are tested for impairment whenever
Intangible assets acquired as part of a business combination, events or changes in circumstances indicate that the carrying
other than goodwill, are initially measured at their fair value amount may not be recoverable. An impairment loss is
at the date of the acquisition. Intangible assets acquired recognised for the amount by which the asset's carrying
separately are initially recognised at cost. Indefinite life amount exceeds its recoverable amount.
intangible assets are not amortised and are subsequently
measured at cost less any impairment. Finite life intangible The recoverable amount is the higher of an asset's fair value
assets are subsequently measured at cost less amortisation less costs of disposal and value-in-use. The value-in-use is the
and any impairment. The gains or losses recognised in profit present value of the estimated future cash flows relating to the
or loss arising from the derecognition of intangible assets are asset using a pre-tax discount rate specific to the asset or cash-
measured as the difference between net disposal proceeds generating unit to which the asset belongs. Assets that do not
and the carrying amount of the intangible asset. The method have independent cash flows are grouped together to form a
and useful lives of finite life intangible assets are reviewed cash-generating unit. Non-financial assets other than goodwill
annually. Changes in the expected pattern of consumption or that suffered impairment are reviewed for possible reversal of
useful life are accounted for prospectively by changing the the impairment at the end of each reporting period.
amortisation method or period.
TRADE AND OTHER PAYABLES
Goodwill
These amounts represent liabilities for goods and services
Goodwill represents the excess of the cost of an acquisition provided to the consolidated entity prior to the end of the
over the fair value of the consolidated entity's share of net financial year and which are unpaid. Due to their short-term
identifiable assets of the acquired subsidiary/associate at the nature they are measured at amortised cost and are not
date of the acquisition. Goodwill on acquisition is included discounted. The amounts are unsecured and are usually paid
in intangible assets. Goodwill is allocated to cash generating within 25 to 90 days of recognition.
units for the purpose of impairment testing. Goodwill is not
amortised. Instead, goodwill is tested annually for impairment, BORROWINGS
or more frequently if events or changes in circumstances
indicate that it might be impaired, and is carried at cost Loans and borrowings are initially recognised at the fair
less accumulated impairment losses. Impairment losses on value of the consideration received, net of transaction costs.
goodwill are taken to profit or loss and are not subsequently They are subsequently measured at amortised cost using the
reversed. effective interest method.

Where there is an unconditional right to defer settlement of
the liability for at least 12 months after the reporting date, the
loans or borrowings are classified as non-current.

61 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

FINANCE COSTS Share-based payments

Finance costs attributable to qualifying assets are capitalised Equity-settled and share-based compensation benefits are
as part of the asset. All other finance costs are expensed in provided to employees.
the period in which they are incurred, including interest on
short-term and long-term borrowings. Equity-settled transactions are awards of shares, or options
over shares, that are provided to employees in exchange for
PROVISIONS the rendering of services.

Provisions are recognised when the consolidated entity has a The cost of equity-settled transactions is measured at fair
present (legal or constructive) obligation as a result of a past value on grant date. Fair value is independently determined
event, it is probable the consolidated entity will be required using the Black-Scholes option pricing model that takes into
to settle the obligation, and a reliable estimate can be made account the exercise price, the term of the option, the impact
of the amount of the obligation. The amount recognised as a of dilution, the share price at grant date and expected price
provision is the best estimate of the consideration required to volatility of the underlying share, the expected dividend
settle the present obligation at the reporting date, taking into yield and the risk free interest rate for the term of the option,
account the risks and uncertainties surrounding the obligation. together with non-vesting conditions that do not determine
If the time value of money is material, provisions are whether the consolidated entity receives the services that
discounted using a current pre-tax rate specific to the liability. entitle the employees to receive payment. No account is taken
The increase in the provision resulting from the passage of of any other vesting conditions.
time is recognised as a finance cost.
The cost of equity-settled transactions is recognised as an
EMPLOYEE BENEFITS expense with a corresponding increase in equity over the
vesting period. The cumulative charge to profit or loss is
Short-term employee benefits calculated based on the grant date fair value of the award,
the best estimate of the number of awards that are likely to
Liabilities for wages and salaries, including non-monetary vest and the expired portion of the vesting period. The amount
benefits, annual leave and long service leave expected to be recognised in profit or loss for the period is the cumulative
settled within 12 months of the reporting date are recognised amount calculated at each reporting date less amounts
in current liabilities in respect of employees' services up to the already recognised in previous periods.
reporting date and are measured at the amounts expected to
be paid when the liabilities are settled. Market conditions are taken into consideration in determining
fair value. Therefore any awards subject to market conditions
Other long-term employee benefits are considered to vest irrespective of whether or not that
market condition has been met, provided all other conditions
The liability for long service leave not expected to be settled are satisfied.
within 12 months of the reporting date are recognised in non-
current liabilities, provided there is an unconditional right to If equity-settled awards are modified, as a minimum an expense
defer settlement of the liability. The liability is measured as is recognised as if the modification has not been made. An
the present value of expected future payments to be made in additional expense is recognised, over the remaining vesting
respect of services provided by employees up to the reporting period, for any modification that increases the total fair value
date using the projected unit credit method. Consideration is of the share-based compensation benefit as at the date of
given to expected future wage and salary levels, experience modification.
of employee departures and periods of service. Expected
future payments are discounted using market yields at the If the non-vesting condition is within the control of the
reporting date on high quality corporate bonds with terms to consolidated entity or employee, the failure to satisfy the
maturity and currency that match, as closely as possible, the condition is treated as a cancellation. If the condition is not
estimated future cash outflows. within the control of the consolidated entity or employee
and is not satisfied during the vesting period, any remaining
Defined contribution superannuation expense expense for the award is recognised over the remaining
vesting period, unless the award is forfeited.
Contributions to defined contribution superannuation plans
are expensed in the period in which they are incurred. If equity-settled awards are cancelled, it is treated as if it
has vested on the date of cancellation, and any remaining
expense is recognised immediately. If a new replacement
award is substituted for the cancelled award, the cancelled
and new award is treated as if they were a modification.

Upon the exercise of options/rights, the balance of share-
based payments reserve relating to those options/rights is
transferred to share capital.

SPECIALTY FASHION GROUP | 62

NOTES TO THE FINANCIAL STATEMENTS

FAIR VALUE MEASUREMENT Where the business combination is achieved in stages, the
consolidated entity remeasures its previously held equity
When an asset or liability, financial or non-financial, is interest in the acquiree at the acquisition-date fair value
measured at fair value for recognition or disclosure purposes, and the difference between the fair value and the previous
the fair value is based on the price that would be received carrying amount is recognised in profit or loss.
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement Contingent consideration to be transferred by the acquirer
date; and assumes that the transaction will take place either: is recognised at the acquisition-date fair value. Subsequent
in the principal market; or in the absence of a principal changes in the fair value of contingent consideration classified
market, in the most advantageous market. as an asset or liability is recognised in profit or loss. Contingent
consideration classified as equity is not remeasured and its
Fair value is measured using the assumptions that market subsequent settlement is accounted for within equity.
participants would use when pricing the asset or liability,
assuming they act in their economic best interests. For The difference between the acquisition-date fair value of
non-financial assets, the fair value measurement is based assets acquired, liabilities assumed and any non-controlling
on its highest and best use. Valuation techniques that are interest in the acquiree and the fair value of the consideration
appropriate in the circumstances and for which sufficient data transferred and the fair value of any pre-existing investment
are available to measure fair value, are used, maximising the in the acquiree is recognised as goodwill. If the consideration
use of relevant observable inputs and minimising the use of transferred and the pre-existing fair value is less than the fair
unobservable inputs. value of the identifiable net assets acquired, being a bargain
purchase to the acquirer, the difference is recognised as a
ISSUED CAPITAL gain directly in profit or loss by the acquirer on the acquisition-
date, but only after a reassessment of the identification and
Ordinary shares are classified as equity. measurement of the net assets acquired, the non-controlling
interest in the acquiree, if any, the consideration transferred
Incremental costs directly attributable to the issue of new and the acquirer's previously held equity interest in the
shares or options are shown in equity as a deduction, net of acquirer.
tax, from the proceeds.
Business combinations are initially accounted for on a
DIVIDENDS provisional basis. The acquirer retrospectively adjusts the
provisional amounts recognised and also recognises additional
Dividends are recognised when declared during the financial assets or liabilities during the measurement period, based on
year and no longer at the discretion of the Company. new information obtained about the facts and circumstances
that existed at the acquisition-date. The measurement period
BUSINESS COMBINATIONS ends on either the earlier of (i) 12 months from the date
of the acquisition or (ii) when the acquirer receives all the
The acquisition method of accounting is used to account information possible to determine fair value.
for business combinations regardless of whether equity
instruments or other assets are acquired. EARNINGS PER SHARE

The consideration transferred is the sum of the acquisition-date Basic earnings per share
fair values of the assets transferred, equity instruments issued
or liabilities incurred by the acquirer to former owners of the Basic earnings per share is calculated by dividing the profit
acquiree and the amount of any non-controlling interest in the attributable to the owners of Specialty Fashion Group Limited,
acquiree. For each business combination, the non-controlling excluding any costs of servicing equity other than ordinary
interest in the acquiree is measured at either fair value or shares, by the weighted average number of ordinary shares
at the proportionate share of the acquiree's identifiable net outstanding during the financial year, adjusted for bonus
assets. All acquisition costs are expensed as incurred to profit elements in ordinary shares issued during the financial year.
or loss.
Diluted earnings per share
On the acquisition of a business, the consolidated entity
assesses the financial assets acquired and liabilities assumed Diluted earnings per share adjusts the figures used in the
for appropriate classification and designation in accordance determination of basic earnings per share to take into account
with the contractual terms, economic conditions, the the after income tax effect of interest and other financing costs
consolidated entity's operating or accounting policies and associated with dilutive potential ordinary shares and the
other pertinent conditions in existence at the acquisition-date. weighted average number of shares assumed to have been
issued for no consideration in relation to dilutive potential
ordinary shares.

63 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

GOODS AND SERVICES TAX ('GST') AND NEW ACCOUNTING STANDARDS AND
OTHER SIMILAR TAXES INTERPRETATIONS NOT YET MANDATORY
OR EARLY ADOPTED
Revenues, expenses and assets are recognised net of the
amount of associated GST, unless the GST incurred is not The table below lists the standards and amendments to
recoverable from the tax authority. In this case it is recognised standards that were available for early adoption and were
as part of the cost of the acquisition of the asset or as part of applicable to the Group. The reported results and financial
the expense. position of the Group are not expected to change on adoption
of any of the amendments to current standards listed below
Receivables and payables are stated inclusive of the amount as they do not result in any changes to the Group’s existing
of GST receivable or payable. The net amount of GST accounting policies.
recoverable from, or payable to, the tax authority is included
in other receivables or other payables in the statement of With respect to the new standards on issue but not yet effective,
financial position. AASB 9 Financial Instruments (2014) and AASB 15 Revenue
from Contracts with Customers, the Group will adopt these
Cash flows are presented on a gross basis. The GST standards from 1 July 2018. The Group is yet to asses the full
components of cash flows arising from investing or financing impact of their adoption but does not expect a material effect
activities which are recoverable from, or payable to the tax on the Group’s results, financial position and disclosures.
authority, are presented as operating cash flows.
With respect to AASB 16 Leases, the Group is yet to assess the
Commitments and contingencies are disclosed net of the full impact of the new standard. The application of AASB 16
amount of GST recoverable from, or payable to, the tax is expected to have a material effect on the Group’s reported
authority. assets and liabilities which will impact key financial ratios.
The Group does not intend on adopting this new standard
ROUNDING OF AMOUNTS before its mandatory effective date.

The Company is a company of the kind referred to in ASIC
Corporations (Rounding in Financials/Directors’ Reports)
Instrument 2016/191, dated 24 March 2016, and in
accordance with that Corporations Instrument amounts in the
directors’ report and the financial statements are rounded off
to the nearest thousand dollars, unless otherwise indicated.

Standard/Amendment to standards Effective date—annual reporting period
beginning on or after
AASB 15—Revenue from Contracts with Customers and the relevant amending
standards 1 January 2018
AASB 9 (2014)—Financial Instruments and the relevant amending standards
AASB 2016-5—Amendments to Australian Accounting Standards—Classification 1 January 2018
and Measurement of Share-based Payment Transactions 1 January 2018
AASB 16—Leases
1 January 2019

SPECIALTY FASHION GROUP | 64

NOTES TO THE FINANCIAL STATEMENTS

NOTE 2. CRITICAL ACCOUNTING JUDGEMENTS, When it is not possible to estimate the recoverable amount
ESTIMATES AND ASSUMPTIONS of an individual asset, the Group estimates the recoverable
amount of the cash generating unit to which the asset belongs.
The preparation of the financial statements requires When a reasonable and consistent basis of allocation can be
management to make judgements, estimates and assumptions identified, corporate assets are also allocated to individual
that affect the reported amounts in the financial statements. cash-generating units, or otherwise they are allocated to the
Management continually evaluates its judgements and smallest group of cash-generating units for which a reasonable
estimates in relation to assets, liabilities, contingent liabilities, and consistent allocation basis can be identified.
revenue and expenses. Management bases its judgements,
estimates and assumptions on historical experience and Intangible assets with indefinite useful lives and intangible
on other various factors, including expectations of future assets not yet available for use are tested for impairment at
events, management believes to be reasonable under the least annually, and whenever there is an indication that the
circumstances. The resulting accounting judgements and asset may be impaired.
estimates will seldom equal the related actual results. The
judgements, estimates and assumptions that have a significant Recoverable amount is the higher of fair value less costs
risk of causing a material adjustment to the carrying amounts of disposal and value in use. In assessing value in use, the
of assets and liabilities (refer to the respective notes) within the estimated future cash flows are discounted to their present
next financial year are discussed below. value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific
Provision for impairment of inventories to the asset for which the estimates of future cash flows have
not been adjusted.
The provision for impairment of inventories assessment
requires a degree of estimation and judgement. The level of If the recoverable amount of an asset (or cash-generating unit)
the provision is assessed by taking into account the historical is estimated to be less than its carrying amount, the carrying
sales experience, the ageing of inventories and other factors amount of the asset (or cash-generating unit) is reduced to
that affect inventory obsolescence. its recoverable amount. An impairment loss is recognised
immediately in profit or loss, unless the relevant asset is
Impairment of goodwill carried at a revalued amount, in which case the impairment
loss is treated as a revaluation decrease.
In accordance with the accounting policy stated in note 1,
the consolidated entity tests annually, or more frequently if When an impairment loss subsequently reverses, the carrying
events or changes in circumstances indicate impairment, amount of the asset (or cash generating unit) is increased to
whether goodwill has suffered any impairment. Determining the revised estimate of its recoverable amount, but so that
whether goodwill is impaired requires an estimation of the the increased carrying amount does not exceed the carrying
value-in-use of the cash-generating units to which goodwill has amount that would have been determined had no impairment
been allocated. The value-in-use calculations require the use loss been recognised for the asset (or cash-generating unit) in
of assumptions, including estimated discount rates based on prior years. A reversal of an impairment loss is recognised
the current cost of capital and growth rates of the estimated immediately in profit or loss, unless the relevant asset is
future cash flows. carried at a revalued amount, in which case the reversal
of the impairment loss is treated as a revaluation increase.
Impairment of other indefinite life intangible assets Further details are provided in note 12.

The consolidated entity tests annually, or more frequently Fair value measurement hierarchy
if events or changes in circumstances indicate impairment,
whether other indefinite life intangible assets have suffered The consolidated entity is required to classify all assets
any impairment. Determining whether other indefinite life and liabilities, measured at fair value, using a three level
intangible assets are impaired requires an estimation of an hierarchy, based on the lowest level of input that is significant
asset's fair value less costs of disposal. to the entire fair value measurement, being: Level 1: Quoted
prices (unadjusted) in active markets for identical assets or
Impairment of tangible assets liabilities that the entity can access at the measurement date;
Level 2: Inputs other than quoted prices included within Level
At the end of each reporting period, the Group reviews the 1 that are observable for the asset or liability, either directly
carrying amounts of its tangible and intangible assets to or indirectly; and Level 3: Unobservable inputs for the asset
determine whether there is any indication that those assets or liability. Considerable judgement is required to determine
have suffered an impairment loss. If any such indication exists, what is significant to fair value and therefore which category
the recoverable amount of the asset is estimated in order to the asset or liability is placed in can be subjective.
determine the extent of the impairment loss (if any).

65 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. OPERATING SEGMENTS

Identification of reportable operating segments

The consolidated entity is organised into one operating segment, being fashion retail. This operating segment is based on the
internal reports that are reviewed and used by the Chief Executive Officer (who is identified as the Chief Operating Decision Maker
('CODM')) in assessing performance and in determining the allocation of resources.

The CODM assess the performance of the operating segment based on a measure of Underlying Earnings Before Interest, Tax,
Depreciation and Amortisation (EBITDA). The accounting policies adopted for internal reporting to the CODM are consistent with
those adopted in the financial statements.

The information reported to the CODM is on at least a monthly basis, including weekly reporting on key metrics.

A reconciliation of operating loss before income tax to Underlying EBITDA is provided as follows:

Consolidated

2017 2016
$'000 $'000

Underlying EBITDA 26,666 25,014
Provision for store exist costs1 (4,903) –
Restructuring costs2
Fair value revaluation of derivative financial instruments through profit or loss3 – (1,873)
Interest revenue (131) (47)
Finance costs 99
Depreciation, amortisation and impairment of property, plant and equipment4 79
Change of control proposal5 (2,207) (3,248)
(24,621) (21,485)
Loss before income tax (1,357)
–

(6,474) (1,540)

1 Relates to provision for store exit costs for City Chic USA stores. Store exit costs include redundancies, restructure, logistics and lease exit costs.
2 Restructuring costs include redundancies, lease and other costs associated with the closure of the Rivers’ Ballarat warehouse.
3 To protect against significant adverse fluctuations in cotton prices, the Company purchased cotton call options. The expense for the year ended 30 June 2017 and

year ended 30 June 2016 reflects fair value revaluation of the cotton call options at the end of the reporting period.
4 Includes one-off store asset impairment of $2.5 million relating to City Chic USA stores.
5 Relates to costs associated with change of control proposal.

Major customers

There is no revenue that is significant from any particular customer. Segment revenue from external parties, assets and liabilities
are all reported to the Chief Executive Officer in a manner consistent with the financial statements.

SPECIALTY FASHION GROUP | 66

NOTES TO THE FINANCIAL STATEMENTS Consolidated

NOTE 4. REVENUE 2017 2016
$'000 $'000
Sales revenue
Sale of goods 807,761 824,680
Other revenue
Interest 79 99
Other revenue 1,074 1,461
1,153 1,560
Revenue
808,914 826,240

67 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 5. EXPENSES

Consolidated

2017 2016
$'000 $'000

Loss before income tax includes the following specific expenses/(credits): – 1,873
24,621 21,485
Restructuring costs1
Depreciation, amortisation and impairment of property, plant and equipment2 2,207 3,248
Interest and finance charges paid/payable 16,438 15,330
Defined contribution superannuation expense 130,951 133,416
Rental expense relating to operating leases
Provision for store exit costs3 4,903 –
Net foreign exchange loss/(gain) 7,610 (17,347)
Inventory shrinkage 6,335
7,645
Total
193,065 165,650
Other expenses:
Utility expenses 11,055 12,624
Maintenance costs 9,711 7,934
Professional and consulting fees 5,004 4,795
Change of control proposal4 1,357 –
Transactional fees and charges 4,340 4,523
Fair value revaluation of derivative financial instruments through profit or loss 131 47
Net (gain)/loss on disposal of plant and equipment (111) 13
Other
48,167 57,264
Total
79,654 87,200

1 Restructuring costs include redundancies, lease and other costs associated with the closure of the Rivers’ Ballarat warehouse.
2 D epreciation and impairment expense for the year was $24.6 million (2016: $21.5 million), which includes one-off store asset impairment of $2.5 million relating to

City Chic USA stores, offset by asset impairment writeback of $1.1 million for the Group (2016: impairment expense of $0.7 million).
3 Relates to provision for store exit costs for City Chic USA stores. Store exit costs include redundancies, restructure, logistics and lease exit costs.
4 Relates to costs associated with change of control proposal.

SPECIALTY FASHION GROUP | 68

NOTES TO THE FINANCIAL STATEMENTS Consolidated

NOTE 6. INCOME TAX EXPENSE 2017 2016
$'000 $'000
(a) Income tax expense
Current tax 833 1,234
Deferred tax—origination and reversal of temporary differences 1,045 (359)
Prior year under/(over) provision (225)
Aggregate income tax expense 37
Deferred tax included in income tax expense comprises: 650
Decrease/(increase) in deferred tax assets (note 14) 1,915
(b) Numerical reconciliation of income tax expense and tax at the statutory rate
Loss before income tax expense 1,045 (359)
Tax at the statutory tax rate of 30%
Tax effect amounts which are not deductible/(taxable) in calculating taxable income: (6,474) (1,540)
(1,942) (462)
Non-deductible entertainment
Sundry items 29 1
26 25
Prior year under/(over) provision
Prior year tax losses not recognised now recouped (1,887) (436)
Difference in overseas tax rates 37 (225)
Foreign currency differences – (193)
Tax loss not recognised (1)
Income tax expense 4 (6)
(26)
3,762 1,536

1,915 650

69 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

Consolidated

2017 2016
$'000 $'000

(c) Amounts credited directly to equity (182) (3,533)
Deferred tax assets (note 14)
12,540 5,121
(d) Income tax losses not recognised 3,762 1,536
Unused tax losses for which no deferred tax asset has been recognised

Potential tax benefit @ 30%

(e) Income tax losses recognised
As at 30 June 2017, the consolidated entity had carried forward income tax losses of $2.0 million (2016: $1.6 million). These
losses were recognised as a deferred tax asset for the years ended 30 June 2017 and 30 June 2016.

(f) Capital losses not recognised
As at 30 June 2017, the consolidated entity had carried forward capital losses of $154.9 million (2016: $154.9 million). These
losses have not been recognised as a deferred tax asset for the years ended 30 June 2017 and 30 June 2016.

(g) Tax consolidation legislation
Specialty Fashion Group Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation
as of 1 July 2003. The accounting policy in relation to this legislation is set out in note 1.

NOTE 7. CURRENT ASSETS—CASH AND CASH EQUIVALENTS

Consolidated

2017 2016
$'000 $'000

Cash at bank and on hand 17,431 18,945

SPECIALTY FASHION GROUP | 70

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. CURRENT ASSETS—TRADE AND OTHER RECEIVABLES

Consolidated

2017 2016
$'000 $'000

Prepayments 3,150 3,787
Other receivables 5,904 5,682

9,054 9,469

The Group assesses at the end of each reporting period whether there is objective evidence that the Group’s receivables are
impaired. Receivables with a short duration are not discounted. A provision for impairment of receivables is not recognised until
objective evidence is available that a loss event has occurred. At reporting date the trade and other receivables are not past due
and not impaired.

NOTE 9. CURRENT ASSETS—INVENTORIES

Consolidated

2017 2016
$'000 $'000

Inventories at lower of cost and net realisable value 90,839 88,733

NOTE 10. CURRENT ASSETS—DERIVATIVE FINANCIAL INSTRUMENTS

Consolidated

2017 2016
$'000 $'000

Call options at fair value* 38

* To protect against significant adverse fluctuations in cotton prices, the Company purchased cotton call options. The expense for the year ended 30 June 2017 and
year ended 30 June 2016 reflects the fair value revaluation of the cotton call options at the end of the reporting period.

Refer to note 27 for further information on financial instruments.

71 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. CURRENT ASSETS—INCOME TAX RECEIVABLE

Consolidated

2017 2016
$'000 $'000

Income tax receivable 35 758

NOTE 12. NON-CURRENT ASSETS—PROPERTY, PLANT AND EQUIPMENT

Consolidated

2017 2016
$'000 $'000

Plant and equipment—at cost 177,839 182,938
Less: Accumulated depreciation and impairment (120,540) (109,305)

Balance at 1 July 2015 57,299 73,633
Additions
Disposals Consolidated
Exchange differences Plant and Equipment
Impairment expense
Depreciation expense $'000
Balance at 30 June 2016
Additions 79,292
Disposals 15,590
Exchange differences
Impairment expense (348)
Depreciation expense 222
Balance at 30 June 2017
(646)
(20,477)

73,633
6,603
(265)
(73)

(1,383)
(21,216)

57,299

SPECIALTY FASHION GROUP | 72

NOTES TO THE FINANCIAL STATEMENTS

Impairment of tangible assets The growth rate has been determined with reference to
industry trends. As part of the annual impairment test for
Determining whether property, plant and equipment is property, plant and equipment, management assesses the
impaired requires an estimation of the value-in-use of the reasonableness of growth rate assumptions by reviewing
cash-generating units (CGUs) to which tangible assets have historical cash flow projections against actual cash flows.
been allocated. These calculations reflect estimated cash flow
projections and requires the use of assumptions, including The discount rates used in the value-in-use calculations are
expected future lease terms; estimated discount rates; growth pre-tax and reflect management's estimate of the time value of
rates of estimated future cash flows; and terminal growth money, as well as the risks specific to the CGUs. The discount
rates. rates have been determined using the average weighted
cost of capital and current market risk-free rate, adjusted for
The value-in-use method in determining the recoverable amount relevant business risks. Discount rate applied in the current
of the CGUs is affected by management's assumptions used in year value-in-use model: 10.9% (2016: 10.9%).
the calculation.
Impairment expense of $1.4 million (2016: $0.7 million) was
The cash flow forecast is based on historical trading recognised in relation to property, plant and equipment during
performance on a CGU level and projected into the future the period. This includes a one-off store asset impairment
based on expected future lease terms. Growth rates of charge of $2.5 million relating to City Chic USA stores, offset
estimated future cash flows are based on a budget that has by an impairment writeback of $1.1 million for the Group.
been approved by the Board, and projected for the expected
future lease term based on an estimated growth rate of 2.25%
(2016: 2.5%).

73 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 13. NON-CURRENT ASSETS—INTANGIBLES

Consolidated

2017 2016
$'000 $'000

Goodwill—at cost 10,095 10,095

Brand valuation 8,505 8,505

Other intangible assets 6,491 2,895
Less: Accumulated amortisation (2,108) (362)
2,533
4,383 21,133
22,983

Reconciliations

Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below:

Consolidated

Goodwill Brand Other* Total
$'000 Valuation $'000 $'000

$'000 18,600
2,895
Balance at 1 July 2015 10,095 8,505 – (362)
Additions – – 2,895
Amortisation expense – – (362) 21,133
3,872
Balance at 30 June 2016 10,095 8,505 2,533
Additions – – 3,872 (2,022)
Amortisation expense – – (2,022)
22,983
Balance at 30 June 2017 10,095 8,505 4,383

* Includes software, website development costs in relation to e-commerce related activities and trademarks.

SPECIALTY FASHION GROUP | 74

NOTES TO THE FINANCIAL STATEMENTS

Goodwill Indefinite life intangible asset—Brand valuation

Determining whether goodwill is impaired requires an On 27 November 2013, Specialty Fashion Group Limited
estimation of the value-in-use of the cash-generating units acquired the business and net assets of Rivers (Australia) Pty
(CGUs) to which goodwill has been allocated. These Ltd ("Rivers"). Rivers is an iconic Australian brand and was
calculations reflect an estimated cash flow projection based acquired at a discount to the fair value of its net assets due
on a five year forecast and requires the use of assumptions, to a low purchase price. An independent valuation of the
including estimated discount rates; growth rates of estimated collective trademarks, trade names and brand names acquired
future cash flows; and terminal growth rates. as part of the transaction resulted in a brand valuation of $8.5
million being recognised as part of the net assets acquired.
The value-in-use method use in determining the recoverable The calculation of the brand's value is based on fair value
amount of the CGUs is affected by management's assumptions less costs of disposal. This amount has been assessed as an
used in the calculation. indefinite life intangible asset as there is no foreseeable limit
to the cash flows generated by the brand.
The five year cash flow forecast is based on the FY2018
budget that has been approved by the Board and projected The fair value was determined independently using the Relief
for a further four years based on an estimated growth from Royalty (“RFR”) valuation method at acquisition date. The
rate of 2.25% (2016: 2.5%). The growth rate has been calculations reflect a five year revenue forecast and requires
determined with reference to industry trends. As part of the the use of assumptions, including estimated royalty rates; tax
annual impairment test for goodwill, management assesses rate; estimated discount rates; and expected useful life.
the reasonableness of growth rate assumptions by reviewing
historical cash flow projections against actual cash flows. The five year revenue forecast is based on the FY2018
budget that has been approved by the Board and projected
The discount rates used in the value-in-use calculations are for a further four years based on an estimated growth rate
pre-tax and reflect management's estimate of the time value of of 2.25% (2016: 2.5%). As part of the impairment test for
money, as well as the risks specific to the CGUs. The discount brand valuation, management assesses the reasonableness
rates have been determined using the average weighted cost of growth rate assumptions by reviewing revenue projections
of capital and the current market risk-free rate, adjusted for against actual revenue.
relevant business risks. Discount rate applied in the current
year value-in-use model: 10.9% (2016: 10.9%). The royalty rates used in the valuation model are based on
rates observed in the market. Royalty rates applied in the
A terminal growth rate of 2.5% (2016: 2.5%) has been valuation model for the current year: 1.0% (2016: 1.0%).
assumed in the value-in-use calculation and reflects the long-
term growth expectations beyond the five year forecast The tax rate applied in the valuation model is based on the
horizon. corporate tax rate in Australia: 30.0% (2016: 30.0%).

No sensitivity analysis was performed given the significant The discount rate applied to present value projected cash flows
excess headroom at reporting date. There has been no (or notional cash flows) was derived by making appropriate
impairment loss recognised relation to goodwill (2016: nil). adjustments to the weighted average cost of capital (“WACC”)
and expanded capital asset pricing model (“CAPM”). The
WACC calculates the rate of return that provides both debt
holders and equity holders with a rate of return adequate to
compensate them for providing debt and equity capital into
an investment with a risk profile comparable to that of Rivers.
The discount rate range applied in the current year: 10.9%
(2016: 10.9%).

There has been no impairment loss recognised in relation to
the brand (2016: nil).

75 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 14. NON-CURRENT ASSETS—DEFERRED TAX ASSET Consolidated

Deferred tax asset comprises temporary differences attributable to: 2017 2016
$'000 $'000
Amounts recognised in profit or loss:
Tax losses 589 491
Property, plant and equipment (9,808) (10,232)
Indefinite life intangible assets (2,551)
Employee benefits (2,551)
Other provisions and accruals 5,705 5,769
Deferred lease incentives 5,263 6,504
Inventories 3,350 3,724
Lay-by debtors 638
Unrealised foreign currency exchange 900 (99)
(73) 182
Amounts recognised in equity:
Derivative financial instruments 6 4,426

Deferred tax asset 3,381

Movements: 1,520 1,338
Opening balance 4,901 5,764
(Charged)/credited to profit or loss (note 6)
Credited to equity (note 24) 5,764 1,213
Underprovision in prior year (1,045) 359

Closing balance 182 3,533
– 659

4,901 5,764

SPECIALTY FASHION GROUP | 76

NOTES TO THE FINANCIAL STATEMENTS Consolidated

NOTE 15. CURRENT LIABILITIES—TRADE AND OTHER PAYABLES 2017 2016
$'000 $'000
Trade payables
Other payables 35,404 33,050
48,663 50,445
Refer to note 27 for further information on financial instruments.
84,067 83,495
NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
Consolidated
Current
Forward foreign exchange contracts–cash flow hedges (current) 2017 2016
Non-current $'000 $'000
Forward foreign exchange contracts–cash flow hedges (non-current)
Total 4,325 4,458
Refer to note 27 for further information on financial instruments.
742 –
NOTE 17. CURRENT LIABILITIES—INCOME TAX PROVISION 5,067 4,458

Income tax provision Consolidated

77 | SPECIALTY FASHION GROUP 2017 2016
$'000 $'000

33 217

NOTES TO THE FINANCIAL STATEMENTS

NOTE 18. CURRENT LIABILITIES—PROVISIONS

Consolidated

2017 2016
$'000 $'000

Provisions–Employee benefits 16,365 16,346
Other provisions 4,664 4,713

21,029 21,059

Other provisions comprises:

Sales return provision
The sales return provision represents managements best estimate of the future outflow of economic benefits in respect of products
sold. The provision is estimated based on historical sales claim information, sales levels and any recent trends that may suggest
future claims could differ from historical amounts.

Lease make good
The provision represents the present value of the estimated costs to make good the premises leased by the consolidated entity at
the end of the respective lease terms.

Stepped lease provision
The stepped lease provision represents the difference between the contract rental charge and that paid over the lease term.

Movements in provisions

The movement in each class of provision during the current financial year, other than employee benefits, are set out below:

Carrying amount at the start of the year Consolidated 2017
Additional provisions recognised Other
Amounts transferred from non-current $'000
Amounts used
4,713
Carrying amount at the end of the year 1,616

785
(2,450)

4,664

SPECIALTY FASHION GROUP | 78

NOTES TO THE FINANCIAL STATEMENTS

NOTE 19. CURRENT LIABILITIES—OTHER

Consolidated

2017 2016
$'000 $'000

Deferred lease incentives 4,772 5,534
Deferred revenue 568 542

5,340 6,076

Deferred lease incentives

The provision represents operating lease incentives received. The incentives are allocated to profit or loss in such a manner that the
rent expense is recognised on a straight-line basis over the lease term.

Deferred revenue

The balance represents outstanding customer reward points which entitled customers to discounts on future purchases. Revenue
from the reward points is recognised when the points are redeemed.

NOTE 20. NON-CURRENT LIABILITIES—BORROWINGS

Consolidated

2017 2016
$'000 $'000

Bank loans 25,714 32,248

Refer to note 27 for further information on financial instruments. Consolidated

Total secured liabilities 2017 2016
$'000 $'000
The total secured liabilities (current and non-current) are as follows:
25,714 32,248
Bank loans

79 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

Assets pledged as security

The bank loans are secured by a cross guarantee and a mortgage debenture given by certain group companies consisting of fixed
and floating charges over all present and future assets of these companies. The bank loan facilities comprise of a working capital
facility and a trade finance facility.

Financing arrangements

The following lines of credit were available at reporting date:

Consolidated

2017 2016
$'000 $'000

Total facilities 52,000 70,000
Bank loans 4,500 4,500
Corporate credit card
56,500 74,500
Used at the reporting date
Bank loans—recognised 25,714 32,248
Bank loans—unrecognised* 1,605 7,194
Total bank loans
27,319 39,442
Corporate credit card
390 392
Unused at the reporting date 27,709 39,834
Bank loans
Corporate credit card 24,681 30,558
4,110 4,108

28,791 34,666

* This represents letters of credit and bank guarantees utilised at reporting date, which are off-balance sheet items.

In June 2017 the Group renewed its external finance facilities such that their maturity date was extended to 28 February 2019.
Consequently the external borrowings at 30 June 2017 totalling $25.7 million have been classified as non-current liabilities. At
balance date, bank loan facilities totalling $52.0 million were available to the Group (30 June 2016: $70.0 million). Of these
facilities, $24.7 million was unused (30 June 2016: $30.6 million).

The total available facilities are subject to a continuing amortisation programme. This will result in the total available facility
reducing to $35.0 million by 30 June 2018. It is the expectation of the directors that the facility arrangements of the Company will
be reassessed well in advance of their maturity date and finance facilities secured that continue to be appropriate for the needs of
the Company.

The existing finance facilities contain specific financial covenants. Based on the Company’s trading to date and agreed budgets,
the directors believe these covenants will be met.

SPECIALTY FASHION GROUP | 80

NOTES TO THE FINANCIAL STATEMENTS

NOTE 21. NON-CURRENT LIABILITIES—PROVISIONS

Consolidated

2017 2016
$'000 $'000

Provisions—Employee benefits 3,286 3,279
Other 7,321 4,879

10,607 8,158

Other provisions

Other provisions include provision for stepped leases which represents the difference between the contract rental charge and that
paid over the lease term.

Movements in provisions

Movements in other provisions during the current financial year, other than employee benefits, are set out below:

Carrying amount at the start of the year Consolidated 2017
Additional provisions recognised Other
Amounts transferred to current $'000

Carrying amount at the end of the year 4,879
3,227
(785)

7,321

NOTE 22. NON-CURRENT LIABILITIES—OTHER

Consolidated

2017 2016
$'000 $'000

Deferred lease incentives 6,613 8,472

81 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 23. EQUITY—ISSUED CAPITAL

Consolidated

2017 2016 2017 2016
Shares Shares $'000 $'000

Ordinary shares—fully paid 192,236,121 192,236,121 134,497 134,497

Ordinary shares

Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to
the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not
have a limited amount of authorised capital.
On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share
shall have one vote.

Share buy-back

There is no current on-market share buy-back.

NOTE 24. EQUITY—RESERVES

Consolidated

2017 2016
$'000 $'000

Foreign currency reserve 107 285
Hedging reserve—cash flow hedges (3,547) (3,121)
Share-based payments reserve
61 61

(3,379) (2,775)

SPECIALTY FASHION GROUP | 82

NOTES TO THE FINANCIAL STATEMENTS

Foreign currency reserve

The reserve is used to recognise exchange differences arising from translation of the financial statements of foreign operations to
Australian dollars.

Hedging reserve—cash flow hedges

The reserve is used to recognise the effective portion of the gain or loss of cash flow hedge instruments that is determined to be an
effective hedge.

Share-based payments reserve

The reserve is used to recognise the value of equity benefits provided to employees and directors as part of their remuneration, and
other parties as part of their compensation for services.

Movements in reserves

Movements in each class of reserve during the current and previous financial year are set out below:

Consolidated

Foreign Hedging Share-based Total
Currency $'000 Payments $'000
$'000
$'000

Balance at 1 July 2015 (301) 5,123 61 4,883
Revaluation—gross – (11,777) – (11,777)
Deferred tax – – 3,533
Currency translation differences arising during the year 3,533 – 586
586 –
Balance at 30 June 2016
Revaluation—gross 285 (3,121) 61 (2,775)
Deferred tax – (608) – (608)
Currency translation differences arising during the year – 182 – 182
– – (178)
Balance at 30 June 2017 (178)

107 (3,547) 61 (3,379)

83 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 25. EQUITY—ACCUMULATED LOSSES

Consolidated

2017 2016
$'000 $'000

Accumulated losses at the beginning of the financial year (78,654) (73,912)
Recognition of deferred tax liability on indefinite life intangibles* – (2,552)

Loss after income tax expense of the year (78,654) (76,464)
Accumulated losses at the end of the financial year
(8,389) (2,190)

(87,043) (78,654)

* Recognition of deferred tax liability on indefinite life intangibles in accordance with a change in accounting policy as detailed in note 1.

NOTE 26. EQUITY—DIVIDENDS
Dividends

There were no dividends paid, recommended or declared during the current or previous financial year.

Franking credits

Consolidated

2017 2016
$'000 $'000

Franking credits available for subsequent financial years based on a tax rate of 30% 45,832 44,730

The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for:

§§ Franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date
§§ Franking debits that will arise from the payment of dividends recognised as a liability at the reporting date
§§ Franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date.

SPECIALTY FASHION GROUP | 84

NOTES TO THE FINANCIAL STATEMENTS

NOTE 27. FINANCIAL INSTRUMENTS

Financial risk management objectives

The consolidated entity's activities expose it to a variety of financial risks: market risk (including foreign currency risk, price
risk and interest rate risk), credit risk and liquidity risk. The consolidated entity's overall risk management program focuses on
the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the
consolidated entity. The consolidated entity uses derivative financial instruments such as forward foreign exchange contracts
to hedge certain risk exposures. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative
instruments. The consolidated entity uses different methods to measure different types of risk to which it is exposed. These methods
include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, ageing analysis for credit risk and
beta analysis in respect of investment portfolios to determine market risk.

Risk management is carried out by senior finance executives ('Finance') under policies approved by the Board of Directors ('the
Board'). These policies include identification and analysis of the risk exposure of the consolidated entity and appropriate procedures,
controls and risk limits. Finance identifies, evaluates and hedges financial risks within the consolidated entity's operating units.
Finance reports to the Board on a monthly basis.

Capital risk management

The consolidated entity's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can
provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost
of capital. The capital risk management policy remains unchanged from the 2016 Annual Report.

In order to maintain or adjust the capital structure, the consolidated entity manages the level of debt that is prudent, facilitates the
execution of the operational plan and provides flexibility for growth while managing the amount of equity and expectation of return
for dividends.

The consolidated entity would look to raise capital when an opportunity to invest in a business or company was seen as value
adding relative to the current company's share price at the time of the investment. The consolidated entity is not actively pursuing
additional investments in the short term as it continues to integrate and grow its existing businesses in order to maximise synergies.

The consolidated entity is subject to certain financing arrangement covenants and meeting these is given priority in all capital risk
management decisions. There have been no events of default on the financing arrangements during the financial year. Formal
notification of this compliance is confirmed on a quarterly basis.

The capital structure of the consolidated entity consists of net debt (borrowings as detailed in note 20 offset by cash and cash
equivalents as detailed in note 7) and equity of the consolidated entity (comprising issued capital, reserves and accumulated losses
as detailed in notes 23 to 25).

Consolidated

Financial Assets 2017 2016
Measured at amortised cost: $'000 $'000
Cash and cash equivalents
Trade and other receivables 17,431 18,945
5,904 5,682
Measured at fair value:
Derivative financial instruments—call options at fair value through profit or loss 23,335 24,627

85 | SPECIALTY FASHION GROUP 3 8
23,338 24,635

NOTES TO THE FINANCIAL STATEMENTS

Consolidated

Financial Liabilities 2017 2016
$'000 $'000
Measured at amortised cost:
Trade and other payables 84,067 84,687
Borrowings 25,714 32,248
109,781 116,935
Measured at fair value:
Derivative financial instruments—cash flow hedges 5,067 4,458
114,848 121,393

MARKET RISK

Foreign currency risk

The consolidated entity undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk
through foreign exchange rate fluctuations.

Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated
in a currency that is not the entity's functional currency. The risk is measured using sensitivity analysis and cash flow forecasting.

In order to protect against exchange rate movements, the consolidated entity has entered into forward foreign exchange contracts.
These contracts are hedging highly probable forecasted cash flows for the ensuing financial year. Under the Group’s risk
management policy, foreign currency transactions are hedged for the subsequent 18 months with foreign currency transactions
over the next 6 months hedged between 80% to 100%.

The contracts are timed to mature when payments for major shipments of inventory are scheduled to be made. The fair value of
forward exchange contracts is determined using forward exchange market rates at reporting date.

The maturity, settlement amounts and the average contractual exchange rates of the consolidated entity's outstanding forward
foreign exchange contracts at the reporting date was as follows:

Buy US Dollars Sell Australian Dollars Future Hedge Rate

2017 2016 2017 2016 2017 2016
$'000 $'000 $'000 $'000 $ $

Buy US Dollars 141,640 126,257 188,883 175,145 0.7501 0.7218
Maturity: 26,000 – 34,742 – 0.7485 0.7218
Less than 1 year
Between 1 and 2 years

SPECIALTY FASHION GROUP | 86

NOTES TO THE FINANCIAL STATEMENTS

The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in
other comprehensive income. When the cash flow occurs, the consolidated entity adjusts the initial measurement of the component
recognised in the balance sheet by the related amount from other comprehensive income.

In respect of the consolidated entity’s hedging position at 30 June 2017, movements in the Australian dollar against the US dollar
with all other variables held constant, post-tax profit for the year would not have been impacted. Equity would have been $14.3
million higher/$17.5 million lower (2016: $11.1 million higher/$13.6 million lower) had the Australian dollar weakened/
strengthened by 10% against the US dollar, arising mainly from foreign forward exchange contracts designated as cash flow
hedges.

The impact of fluctuations in New Zealand dollar, South African Rand and Chinese RMB against the Australian dollar on post-tax
profit and other balance sheet items would not be significant. This position has not changed from 2016.

Price risk

In order to protect against significant adverse fluctuations in cotton prices, the Group purchased cotton call options with a fair value
of $3,000 at 30 June 2017 (2016: $8,000). The expense for the year ended 30 June 2017 reflects the fair value revaluation of
the cotton call options at the end of the reporting period.

At 30 June 2017, if the fair value of options had changed by +/-10% from the year-end values with all other variables held
constant, the impact on post-tax profit for the year would have been insignificant (2016: not applicable).

Interest rate risk

The Group's main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to
interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group entity takes out
commercial bills under pre-arranged facilities in order to have the flexibility to meet the entity’s working capital and cash flow needs
and keep borrowings at a minimum and reduce exposure to interest rate risk.

At 30 June 2017, if interest rates had changed by +/-100 basis points from the year-end rates with all other variables held
constant, the impact on post-tax profit for the year would have been $0.4 million lower/higher (2016: $0.6 million lower/higher).
The weighted average interest rate at 30 June 2017 is 3.53% (2016: 3.78%).

As at the reporting date, the consolidated entity had the following variable interest rate cash and deposits and borrowings
outstanding:

Consolidated 2017 Consolidated 2016

Consolidated Weighted Balance Weighted Balance
Average $'000 Average $'000
Cash and deposits Interest Rate Interest Rate
Bank loans
Net exposure to cash flow interest rate risk % %

1.06% 17,431 1.36% 18,945
3.53% (25,714) 3.78% (32,248)

(8,283) (13,303)

CREDIT RISK

Credit risk refers to the risk that a counter-party will default on its contractual obligations resulting in financial loss to the Group.
Credit risk arises from cash and cash equivalents, derivatives and deposits with banks. Sales to retail customers are settled in cash
or using major credit cards, mitigating risk to the consolidated entity. For banks only independently rated parties with a minimum
rating of "AA" are accepted. The maximum exposure to the consolidated entity at reporting date is the carrying amount of the
financial assets mentioned above.

87 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

LIQUIDITY RISK 2019. The bank loan facilities comprise of a working capital
facility of $20.0 million and trade finance facilities of $32.0
Prudent liquidity risk management requires the consolidated million. At balance date, bank loan facilities totalling $52.0
entity to maintain sufficient liquid assets (mainly cash and cash million were available to the Group (30 June 2016: $70.0
equivalents) and available borrowing facilities to be able to million). Of this facility, $24.7 million was unused (30 June
pay debts as and when they become due and payable. 2016: $30.6 million).

The consolidated entity manages liquidity risk by maintaining Management monitors rolling forecasts of the consolidated
adequate cash reserves and available borrowing facilities by entity’s liquidity reserve (comprising the undrawn borrowing
continuously monitoring actual and forecast cash flows and facilities below) and cash and cash equivalents on the basis
matching the maturity profiles of financial assets and liabilities. of expected cash flows. This is generally carried out at local
level in the operating companies of the consolidated entity in
Inventory management methods and established supplier accordance with practice and limits set by the consolidated
relationships assist management to prepare rolling forecasts entity. These limits vary by location to take into account the
of the consolidated entity's cash flow requirements to liquidity of the market in which the entity operates. In addition,
monitor the liquidity position and optimise its cash return on the consolidated entity’s liquidity management policy involves
investments. Typically the consolidated entity ensures that it projecting cash flows in major currencies and considering
has sufficient cash on demand to meet expected operational the level of liquid assets necessary to meet these, monitoring
expenses for the period of 12 months, including the servicing balance sheet liquidity ratios against internal and external
of financial obligations; this excludes the potential impact of regulatory requirements and maintaining debt financing
extreme circumstances that cannot reasonably be predicted, plans.
such as natural disasters. In addition, the consolidated entity
maintains the following lines of credit: Financing arrangements

In June 2017, the Group renewed its external finance facilities Unused borrowing facilities at the reporting date:
such that their maturity date was extended to 28 February

Consolidated

2017 2016
$'000 $'000

Bank loans 24,681 30,558
Corporate credit card 4,110 4,108

28,791 34,666

Remaining contractual maturities

The following tables detail the consolidated entity's remaining contractual maturity for its non-derivative assets and liabilities.
The tables have been drawn up based on the undiscounted cash flows of non-derivative assets and liabilities based on the
earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows
disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of
financial position.

SPECIALTY FASHION GROUP | 88

NOTES TO THE FINANCIAL STATEMENTS

Consolidated 2017

Weighted 1 Year Between 1 Between 2 Over Remaining
Average or Less and 2 Years and 5 Years 5 Years Contractual
Interest Rate $'000
$'000 $'000 $'000 Maturities
% $'000

NON-DERIVATIVES—LIABILITIES

Non-interest bearing – 84,067 – – – 84,067
Trade and other payables
– – 25,714
Interest-bearing—variable 3.53 – 25,714 – – 109,781
Borrowings 84,067 25,714

Total non-derivatives liabilities

Consolidated 2016

Weighted 1 Year Between 1 Between 2 Over Remaining
Average or Less and 2 Years and 5 Years 5 Years Contractual
Interest Rate $'000
$'000 $'000 $'000 Maturities
% $'000

NON-DERIVATIVES—LIABILITIES

Non-interest bearing – 83,495 1,192 – – 84,687
Trade and other payables 3.78
– 32,248 – – 32,248
Interest-bearing—variable 83,495 33,440 – – 116,935
Borrowings

Total non-derivatives liabilities

The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above.

89 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

The following table details the consolidated entity’s liquidity analysis for its derivative financial instruments. The table has been
drawn up based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis,
and the undiscounted gross inflows and outflows on those derivatives that require gross settlements.

Consolidated 2017

1 Year Between 1 Between 2 Over Remaining
or Less and 2 Years and 5 Years 5 Years Contractual
$'000
$'000 $'000 $'000 Maturities
$'000

Derivative Asset/(Liability) 3 – – –3

Call options (4,325) (742) – – (5,067)
Forward foreign exchange contracts
(4,322) (742) – – (5,064)
Total derivatives

Consolidated 2016

1 Year Between 1 Between 2 Over Remaining
or Less and 2 Years and 5 Years 5 Years Contractual
$'000
$'000 $'000 $'000 Maturities
$'000

Derivative Asset/(Liability) 8 – – –8
(4,458) – – – (4,458)
Call options
Forward foreign exchange contracts (4,450) – – – (4,450)

Total derivatives

FAIR VALUE OF FINANCIAL INSTRUMENTS

This note provides information about how the consolidated entity determines fair values of various financial assets and financial
liabilities. Fair values of financial instruments are categorised by the following levels:

§§ Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
§§ Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as

prices) or indirectly (derived from prices)
§§ Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs)

The consolidated entity has financial assets and liabilities which are measured at fair value at the end of each reporting period.
Forward foreign exchange contracts (see note 16) and call options at fair value through profit and loss (see note 10) are measured
at fair value using level 2 inputs.

The fair values of the financial assets and financial liabilities included in the level 2 fair value hierarchy have been determined in
accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being
the discount rate that reflects the credit risk of counterparties. There were no transfers between levels during the financial year.

SPECIALTY FASHION GROUP | 90

NOTES TO THE FINANCIAL STATEMENTS

Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. The carrying amounts of receivables,
trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial
liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for
similar financial instruments.

NOTE 28. KEY MANAGEMENT PERSONNEL DISCLOSURES

Directors

The following persons were directors of Specialty Fashion Group Limited during the financial year:
§§ A McDonald—Non-Executive Director, Co-Chairperson
§§ M Hardwick—Non-Executive Director, Co-Chairperson
§§ G Perlstein—Chief Executive Officer
§§ A Hardwick—Non-Executive Director
§§ M Quinn—Non-Executive Director
§§ G Levy—Chairperson and Non-Executive Director (retired 17 November 2015)
§§ I Miller—Non-Executive Director (retired 17 November 2015)

Other key management personnel

The following persons also had the authority and responsibility for planning, directing and controlling the major activities of the
consolidated entity, directly or indirectly, during the financial year*:
§§ S Moura—General Manager People and Culture
§§ T Karp—Chief Operating Officer (appointed 11 July 2016)
§§ G Spreckley—Chief Financial Officer and Company Secretary (resigned 10 October 2016)

* Tim Fawaz was appointed as Chief Financial Officer of the Company on 1 July 2017; therefore no disclosure has been included in respect of
key management personnel remuneration for the year ended 30 June 2017.

Compensation

The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set
out below:

Consolidated

2017 2016
$ $

Short-term employee benefits 2,498,451 1,900,433
Post-employment benefits 122,338 117,065

2,620,789 2,017,498

91 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

Shareholding

The number of shares in the parent entity held during the financial year by each director and other members of key management
personnel of the consolidated entity, including their personally related parties, is set out below. There were no changes to directors
and key management personnel shareholding subsequent to the year end and up to the report date.

Consolidated

2017 2016

Directors' shareholding 15,000 15,000

A McDonald 220,000 220,000
M Hardwick
G Perlstein 17,862,814 17,862,814
A Hardwick*
M Quinn 38,742,203 38,742,203
G Levy AO**
I Miller** ––

Total shares held by directors – 2,365,564

– 14,509,906

56,840,017 73,715,487

* Beneficial interest holding through NAAH Pty Ltd and NAAH Investments Pty Ltd.
** G Levy and I Miller retired as directors of Specialty Fashion Group Limited on 17 November 2015.

SPECIALTY FASHION GROUP | 92

NOTES TO THE FINANCIAL STATEMENTS

NOTE 29. REMUNERATION OF AUDITORS

During the financial year the following fees were paid or payable for services provided by Deloitte Touche Tohmatsu, the auditor
of the Company, and its network firms:

Consolidated

Auditor of the parent entity 2017 2016
Audit services—Deloitte Touche Tohmatsu $ $
Audit or review of the financial statements
Other services—Deloitte Touche Tohmatsu 393,000 399,000
Tax compliance services including review of company income tax returns
Tax advisory services 30,000 38,500
Other advisory services 19,100 43,185
132,000
Network firms of the parent entity auditor 5,000
Audit services—Deloitte Touche Tohmatsu
Audit or review of the financial statements 54,100 213,685
Other services—Deloitte Touche Tohmatsu
Tax compliance services including review of company income tax returns 447,100 612,685
Tax advisory services
Other advisory services Consolidated

2017 2016
$ $

10,720 9,490

64,150 57,660
71,435 35,035

1,460 –

137,045 92,695

147,765 102,185

It is the consolidated entity's policy to employ Deloitte on assignments additional to their statutory audit duties where Deloitte's
expertise and experience with the consolidated entity are important. These assignments are principally tax advice and other
advisory services, or where Deloitte is awarded assignments on a competitive basis. It is the consolidated entity's policy to seek
competitive tenders for all major consulting projects.

93 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 30. CONTINGENT LIABILITIES

The consolidated entity had contingent liabilities at 30 June 2017 in respect of:
Cross guarantees by and between Specialty Fashion Group Limited and Millers Fashion Club (QLD) Pty Limited. These are described
in note 35. No deficiencies of assets exist in any of these companies.
Security for borrowings is detailed in note 20.
No material losses are anticipated in respect of any of the above contingent liabilities.

NOTE 31. COMMITMENTS

Consolidated

2017 2016
$'000 $'000

Capital commitments 2,192 2,298
Committed at the reporting date but not recognised as liabilities, payable:
Property, plant and equipment 74,651 83,280
93,977 101,138
Lease commitments—operating
Committed at the reporting date but not recognised as liabilities, payable: 832 1,519
Within one year
One to five years 169,460 185,937
More than five years

There were no assets pledged as security at the reporting date.

Not included in the above commitments are contingent rental payments which may arise in the event that sales revenue exceeds a
pre-determined amount.

SPECIALTY FASHION GROUP | 94

NOTES TO THE FINANCIAL STATEMENTS

NOTE 32. RELATED PARTY TRANSACTIONS

Parent entity

Specialty Fashion Group Limited is the parent entity.

Subsidiaries

Interests in subsidiaries are set out in note 34.

Key management personnel

Disclosures relating to key management personnel are set out in note 28 and the remuneration report included in the directors'
report.

Transactions with related parties

The following transactions occurred with related parties:

Consolidated

2017 2016
$ $

Payment for other expenses: 296,517 411,204
– 230,804
Lease of business premises in which I Miller and G Perlstein, directors of the
consolidated entity, have an interest* 1,500 9,000

Lease of business premises in which G Levy, director of the consolidated entity,
has an interest*

Consulting fees for training services paid to a company that is associated with
G Perlstein, a director of the consolidated entity

* There is a decrease in lease expense payments from prior year as amounts included in FY2016 represent the portion payable to directors until
their retirement date. I Miller and G Levy retired as directors of Specialty Fashion Group Limited on 17 November 2015.

I Miller1 and G Perlstein are directors and shareholders of companies that own the business premises at 151–163 Wyndham Street,
Alexandria which is leased to the consolidated entity. Lower than market rental for these premises was agreed to commercially
offset the benefits to these directors of the improvements to this property by converting warehouse space to office space. The non-
executive directors were satisfied that the overall arrangement is in the best interests of all shareholders.
G Levy is a director and minority shareholder of the company that owns the business premises at 1–3 Mandible Street, Alexandria
which is leased to the consolidated entity. During the 2012 year, the consolidated entity committed to undertake building
improvements at these premises to convert warehouse space to office space. The non-executive directors at the time considered the
impact these improvements would have on the market value of the property. The consolidated entity pays rent based on the market
value of the unimproved premises. The non-executive directors were satisfied that the overall arrangement is in the best interests of
all shareholders.

Receivable from and payable to related parties

There were no trade receivables from or trade payables to related parties at the current and previous reporting date.

95 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

Loans to/from related parties 2017 2016
$'000 $'000
There were no loans to or from related parties at the current and previous reporting date.

Terms and conditions

All transactions were made on normal commercial terms and conditions and at market rates.

NOTE 33. PARENT ENTITY INFORMATION

Set out below is the supplementary information about the parent entity.

Statement of profit or loss and other comprehensive income

Parent

Revenue 754,040 775,883
Expenses (751,079) (776,281)
Profit/(loss) before income tax
Income tax expense 2,961 (398)
Profit/(loss) after income tax (955) (799)
Other comprehensive loss 2,006 (1,197)
Total comprehensive income/(loss) (428) (8,244)
1,578 (9,441)
Statement of financial position
2017 2016
Parent $'000 $'000

Total current assets 99,858 97,669
Total assets 197,485 209,476
Total current liabilities 110,617 111,390
Total liabilities 151,832 160,846

Equity 134,497 134,497
Issued capital – (2)
Foreign currency reserve
Hedging reserve–cash flow hedges (3,547) (3,119)
Share-based payments reserve 61 61
Accumulated losses
(85,358) (82,807)

Total equity 45,653 48,630

SPECIALTY FASHION GROUP | 96

NOTES TO THE FINANCIAL STATEMENTS

Guarantees entered into by the parent entity in relation to the debts of its subsidiaries

The same guarantee disclosure applies to both parent and consolidated accounts. Refer to note 35 for further details.

As at 30 June 2017, the parent entity has net current liabilities of $10.8 million (2016: net current liabilities of $13.7 million). This
has arisen due to the classification of intercompany receivables/payables as current/non-current with wholly-owned subsidiaries
of the parent entity in accordance with AASB 132 Financial Instruments: Presentation. These intercompany balances eliminate on
consolidation. Notwithstanding the classification of these balances, the parent entity is able to control the timing of the payment of
these balances by virtue of its control of the respective subsidiary entities. In addition, the directors believe that the Company can
meet its debts as and when they fall due. Refer to note 20 for further details.

Contingent liabilities

Not included above are contingent rental payments which may arise in the event that sales revenue exceeds a predetermined
amount. Refer to note 31 for further details.

The parent entity had capital commitments for property, plant and equipment as reporting date:

Parent 2016
$'000
2017
$'000

Committed at the reporting date but not recognised as liabilities, payable: 2,192 2,298
Property, plant and equipment

Significant accounting policies

The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in note 1, except for
the following:

§§ Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity.
§§ Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator

of an impairment of the investment.

97 | SPECIALTY FASHION GROUP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 34. INTERESTS IN SUBSIDIARIES

The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with
the accounting policy described in note 1:

Ownership Interest

Principal Place of 2017 2016
Business/Country % %

of Incorporation

Miller's Fashion Club (QLD) Pty Limited Australia 100.00% 100.00%
Specialty Fashion Group No. 1 Pty Limited (formerly known as Specialty
Fashion Group Leasing Pty Limited) Australia 80.00% 80.00%
Specialty Fashion Group No. 2 Pty Limited
Crossroads Clothing Co. Pty Limited Australia 100.00% 100.00%
City Chic International Pty Limited Australia 100.00% 100.00%
Specialty Fashion Group New Zealand Limited Australia 100.00% 100.00%
Specialty Fashion Group (Shanghai) Limited Company New Zealand 100.00% 100.00%
Specialty Fashion Group South Africa (Pty) Ltd 100.00% 100.00%
Specialty Fashion Group USA Incorporated China 100.00% 100.00%
Miller's Fashion Club (VIC) Pty Limited (deregistered 25 April 2017) South Africa 100.00% 100.00%
Miller's Fashion Club (WA) Pty Limited (deregistered 13 March 2017) United States 100.00%
Specialty Fashion Group No. 3 Pty Limited (deregistered 24 April 2017) – 100.00%
Specialty Fashion Group No. 4 Pty Limited (deregistered 2 March 2017) Australia – 100.00%
Yip Eks Pty Limited (deregistered 2 March 2017) Australia – 100.00%
H&H Corporation Pty Limited (deregistered 2 March 2017) Australia – 100.00%
McSeveny DA Pty Limited (deregistered 13 March 2017) Australia – 100.00%
GIP Fashions Pty Limited (deregistered 25 April 2017) Australia – 100.00%
Selbourne Australia Pty Limited (deregistered 2 March 2017) Australia – 100.00%
Australia – 100.00%
Australia –
Australia

SPECIALTY FASHION GROUP | 98

NOTES TO THE FINANCIAL STATEMENTS

NOTE 35. DEED OF CROSS GUARANTEE

The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others:

§§ Specialty Fashion Group Limited §§ Miller's Fashion Club (QLD) Pty Limited

By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare financial statements
and directors' report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments
Commission ('ASIC').

The above companies represent a 'Closed Group' for the purposes of the Class Order, and as there are no other parties to the Deed
of Cross Guarantee that are controlled by Specialty Fashion Group Limited, they also represent the 'Extended Closed Group'. All
companies in the Closed Group are dormant, except for Specialty Fashion Group Limited. The financial results of the Closed Group
are the same as the financial results of the parent entity which are disclosed in the 'Parent entity' note 33.

NOTE 36. RECONCILIATION OF LOSS AFTER INCOME TAX TO NET CASH FROM OPERATING
ACTIVITIES

Consolidated

2017 2016
$'000 $'000

Loss after income tax expense for the year (8,389) (2,190)

Adjustments for: 23,238 20,839
Depreciation and amortisation expense 1,383 646
Impairment of property, plant and equipment (251) 364
Foreign exchange differences (111) 13
Net (gain)/loss on disposal of non current assets 131 47
Fair value revaluation of derivative financial instruments through profit or loss 208 –
Other
415 (1,031)
Change in operating assets and liabilities: (2,106) 322
Decrease/(increase) in trade and other receivables
(Increase)/decrease in inventories 1,045 (1,018)
Decrease/(increase) in deferred tax assets (126) (54)
Increase in derivative assets
Decrease/(increase) in current tax 540 1,798
Increase in trade and other payables* 4,765 14,321
Decrease in other provisions (174) (3,337)

Net cash from operating activities 20,568 30,720

* Movement in trade and other payables excludes amounts payable for property, plant and equipment.
99 | SPECIALTY FASHION GROUP